easyJet (EJTTF, OTCQX:ESYJY) has been successful in raising its level of liquidity and driving down costs as the whole airline industry continues to suffer from the ongoing pandemic. By laying off its pilots and cabin crew members and closing its major bases, the airline was able to preserve as much cash as possible, and at the end of June, it had £2.4 billion (~$3.01 billion) in cash reserves. In the next couple of months, easyJet will be operating at 30% of its capacity, and it doesn’t expect to recover to its pre-COVID-19 levels in the next couple of years. The company’s expectations are in line with the IATA forecast, which suggests that the airline industry will be able to fully recover from the pandemic only by 2023.
The good news is that in recent months, easyJet was able to arrange several deals with Airbus (EADSF, EADSY) to defer the delivery date of some of its ordered aircrafts by a couple of years, which will give it more financial flexibility to deal with the pandemic. By the end of 2021, the airline plans to operate slightly more than 300 planes, 15% below its pre-COVID-19 expectations. While Europe slowly starts to recover from the initial round of lockdowns, there’s still a high risk that the continent will see a second wave of the virus, which will lead to additional lockdowns that will hurt economic activity. For that reason, and due to the fact that easyJet didn’t offer any full-year guidance, we believe that it’s better to avoid its stock and look for other opportunities from other industries that were not affected so much by the virus.
Too Much Uncertainty
Like every other airline in the world, easyJet was negatively affected by the spread of COVID-19. In March, the airline was forced to fully ground all its fleet and was able to resume flying only in the middle of June. Right now, easyJet plans to ramp up its operations and reopen 75% of its network by the end of summer.
Thanks to the implementation of several self-help measures, along with the strong performance at the beginning of the year, easyJet was able to report an increase in revenues in the first half of its fiscal year. Its latest report for H1, which was released a couple of weeks ago, shows that from October to March, the airline’s revenues were £2.38 billion (~2.99 billion), up 1.6% Y/Y, while the revenue per seat increased by 9.6% Y/Y to £55.6 (~$69.76). However, the company’s net losses for the period were £353 million (~$443 million), due to the inefficient fuel hedges, which alone cost the airline £164 million (~$205 million). The earnings report for the period of April-June is going to be released in August.
Despite the loss, easyJet has one of the best operating and net margins among its peers, and with a P/E of 11x, its stock trades close to its competitors, as the industry’s median P/E is 9x.
Source: Capital IQ
easyJet was unable to accelerate the reopening in the middle of June, as the UK government forced all the new entrants to go through a 14-day quarantine. Only recently, the country’s authorities eased the restrictions and dismissed the self-isolation rule for entrants from a large number of European countries in which easyJet operates. Despite this setback, the company has a strong balance sheet to survive the pandemic and recover once the virus is contained. Recently, the airline was able to raise additional cash from the open market, and at the end of June, it had £2.4 billion (~$3.01 billion) in cash reserves.
In addition, in the last few months, easyJet implemented a number of cash preservation measures that will give the airline financial flexibility to better weather the current storm. The airline reached a deal with Airbus, and it’s now able to defer or cancel leases on 24 aircraft that are due for renewal in the next year and a half. easyJet also enrolled in the UK’s government payroll program and received around £600 million (~$758 million) to cover its wages. At the same time, the airline has plans to close its London Stansted, London Southend and Newcastle bases, which will lead to the layoff of more than 700 pilots and nearly 1300 cabin crew members.
All of these efforts show that the management of easyJet understands the need to preserve as much cash as possible in order to survive the crisis. While easyJet’s books have not been overleveraged, the management of the airline still decided to raise £419 million (~$530 million) in exchange for nearly 15% of its share capital. By diluting all of its existing shareholders, company management was able to decrease the ownership stake of its biggest shareholder and the airline’s founder, Haji-Ioannou. A few months ago, Haji-Ioannou unsuccessfully tried to purge easyJet’s management team, as he failed to force the airline’s management to cancel its order for 107 Airbus planes. Since after the offering his group EasyGroup owns less than 30% of easyJet, the controlling shareholder regime that was signed in 2014 is now terminated.
Despite all of these efforts to prop up liquidity and end the internal differences, there are still risks that are associated with easyJet. While the European countries managed to better contain the virus in comparison to the United States, there’s still a risk that a second wave of the spread of the virus might begin, as travel inside the continent is now resumed. This could lead to another round of lockdowns, which will hurt the airline’s business even more, as easyJet believes that in a zero-revenue environment, it’ll burn around £333 million (~$421 million) per month. With £2.4 billion (~$3.01 billion) in cash reserves, the company has enough liquidity to cover those losses for a while. However, we should not forget that it also has $1.8 billion of outstanding long-term debt. In our opinion, that amount of debt is not going to give the airline enough financial flexibility to tackle the cash burn problem in the long run, if another round of lockdowns is indeed implemented.
While it’s unlikely that easyJet will not be making any revenues going forward, its growth rate is going to disappoint a lot of shareholders. Not only is easyJet going to compete with other low-cost carriers such as Ryanair (RYAAY) and Wizz Air (WZZAF), which offer cheaper tickets to passengers, but it will also be fighting with legacy carriers for passengers in a low-demand environment. In the last few months, several European flagship airlines, such as Air France-KLM (OTCPK:AFRAF), Alitalia, Lufthansa (OTCQX:DLAKF), and others, have received more than €33 billion (~$37.7 billion) of taxpayers’ money to avoid bankruptcies. With that amount of funding, they’ll be able to drop down ticket prices for the next few months to increase their load factors, while not worrying too much about losses. In such a distorted environment, we believe that it will be hard for easyJet to successfully compete with others, since it has no access to public funds and needs to rely solely on itself to weather the current crisis.
Currently, IATA expects the air travel to return to its pre-COVID-19 levels only in 2023, which means that easyJet will be underperforming for a couple of years before fully recovering from the pandemic. While the management plans to reopen 75% of its routes by the end of summer, it expects to operate only at 30% of its total capacity for the same period. Considering all of this, we believe that despite having enough liquidity to withstand the crisis, there’s still too much uncertainty regarding the recovery timeline of air travel. For that reason, it’s better to avoid easyJet stock and look for opportunities in other industries, which were not affected so much by COVID-19 and are not burning cash on a daily basis.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.